6-1-18: Our loan is going to start adjusting in 2019, should we refinance and fix the rate now or wait?
Question of the week: Our loan is going to start adjusting in 2019, should we refinance and fix the rate now or wait?
Answer: Many families purchased or refinanced their homes several years ago with intermediate adjustable rate mortgages, or intermediate ARMs. The type of ARMs have a period where the rate is fixed and at the end of that period enter a period where the rate adjusts, usually annually. If you have a 5/1 ARM the rate is fixed for five years and then adjusts annually for the remaining 25 years; if your loan is a 7/1 it is fixed for seven years and then adjusts for the remaining 23 years.
Why would anyone get an adjustable rate mortgage after all the issues with ARMs leading into the housing crisis and meltdown of the mortgage industry? Everyone has different motivations and objectives with their homes and therefore different mortgages are attractive and beneficial to different property owners. The primary reason for most who choose an ARM for their mortgage is they often have lower interest rates than a 30-year fixed rate mortgage. The lower rate for a period of time is attractive to those who need the lower rate to qualify, or have reasonable certainty that they will be out of the loan before it adjusts.
Not an insignificant number of borrowers who get intermediate ARMs are still in those mortgages when the fixed rate period is ending, either the plans to pay-off the balance did not come to fruition, or their plan was to stay in the property and deal with the issue of an adjustable mortgage later. And later is today or in the near future.
Back to our question, if you have an intermediate ARM on your property and are approaching the end of the fixed rate period should you retain the ARM or refinance to a fixed rate mortgage?
As with almost all questions regarding mortgages and finances there is not one answer that fits everyone. The answer to the question differs depending on individual circumstances and comfort levels of risk. Factors to consider when deciding if you should refinance from your current ARM mortgage or stick with it:
What is your loan balance?
What is the current fixed interest rate on the loan?
What is the index and margin on the mortgage that will take effect when it becomes adjustable?
Realistically, how long do you think you will remain in the property?
With the answers to these questions we can help you determine if it makes sense for you to refinance or retain your current mortgage.
With recent dip in rates we are seeing many homeowners able to refinance to lower rates than the rate it appears their intermediate ARM will be after the initial adjustment. If you have a loan that is going to adjust in the future call me to run through the numbers with you to see if it makes sense to refinance and fix your rate and avoid future rate increases.
Have a question? Ask me!
Mille grazie! That was the message from borrowers this week who were able to lock in rates that dipped this week thanks to another political fiasco in Italy. This past week the Italian President rejected the Prime Minister and Finance Minister submitted by a coalition of far-right and far-left parties that together represent a majority of seats in Parliament after elections in March. This veto by the President spooked markets and investors. As unlikely as it seems for a far-right and a far-left part to come together to form a ruling coalition, it seems less likely when the primary issue for both parties was throwing out the parties that have ruled Italy for decades, desire to leave the European Union and enact reforms to grow employment and the economy. Essentially, both the left and right appealed to the populist majority using the same issues.
How does this affect mortgage rates? A basic principle in investing is “flight to safety.” Italy has created a flight to safety environment with its political instability. With the President vetoing new leadership for Parliament and the nation he has also vetoed the will of the majority of voters in Italy. This has, not surprisingly, upset the populist politicians and leaves the country in limbo. Italy has had financial issues for more than a decade—long-time WR&MU readers will recall the series of posts over the years on Italy, Greece and Spain and the financial challenges they have put on the European Union and other nations as they faced defaulting on their loan payments. The turmoil has created a very uncertain economic environment, for Italy, the European Union (think Brexit) and possibly spilling over into other economies in Asia and North America. When there is uncertainty investors sell riskier investments, i.e. stocks, and purchase safe investments with fixed rates of return, which are bonds and mortgages. When there is uncertainty and risk the flight to safety causes the prices of fixed rate investments to rise and therefore rates to drop.
While foreign politics impacted rates this week, domestically there was some important data on the economy released this weekend. Midweek the second estimate of Gross Domestic Product growth for the first quarter was released and total growth was revised slightly downward to 2.2% growth from initial 2.3% estimate. Also, slightly downgraded were the price index, from 2.0% inflation to 1.9%, and consumer spending for the quarter from 1.1% to 1.0% increase for the quarter. Overall the news was expected and had no impact on mortgage rates.
Coming it at expectations, personal income and spending data for April released on Thursday showed not a lot of strength or weakness in either category. Income was up 0.3% for the month and consumer spending rose 0.6%, mostly due to rising gas prices. With spending outpacing in come for the second month in a row the signs are there for second quarter GDP growth to be stronger than the first quarter. The data alone is mortgage rate neutral, the long-term look regarding prices and economic growth is somewhat rate unfriendly.
Historic data this morning from the Labor Department as the headline unemployment number for May came in at 3.8%, tying the lowest unemployment rate for the past 46 years (2000). The economy added 223,000 jobs in the month, with 218,000 being in the private sector. The gains in jobs lowered the participation rate to 62.7%, matching a low hit several times since 2015. With increased employment and hours worked stagnant it is not surprising that average hourly earnings increased a respectable 0.3% for the month and 2.7% from May 2017—outpacing inflation annualized at 1.9%. The news is mortgage rate unfriendly.
Rates for Friday June 1, 2018: Thanks to the Italian, and possible European, political and economic turmoil this week rates dropped for the second Friday in a row—the last time we had back to back rate drops reflected in the Weekly Rate & Market Update was March 31s to April 14th 2017. The dip is a surprise to many, including myself. My suggestion is to take advantage of the dip.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS:
30 year conforming 4.375% Down 0.125%
30 year high-balance conforming 4.625% Down 0.125%
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.
According to the meteorologists in the house, and what teenagers with iPhones are not constantly in touch with local weather, it appears as if our spring weather is slowly leaving and much warmer summer weather is approaching. They are excited, I have told them don’t get in too much of a hurry for the hot weather, once it comes we will have it until October.
Me, I’m very content with high 60’s, low 70’s, slight breezes and some clouds.
Have a great week,
Dennis
